Tesco's Clarke Says China Will Be Profitable Under His Tenure

By Sarah Shannon -
Sep 12, 2010

Tesco Plc Chief Executive Officer-
designate Philip Clarke said China will become profitable for
the retailer during his tenure as the company invests 2 billion
pounds ($3.1 billion) into developing shopping malls.

“My view now is China is one of the most important markets
for us,” said Clarke, 50, who plans to spend about 85 working
days a year abroad when he takes over from Terry Leahy in March.
“The growth opportunities in the U.K. are still there, but in
Asia you can carry on building a very significant number of
stores for a very long time.”

Tesco is playing catch-up in China to Wal-Mart Stores Inc.
and Carrefour SA, which entered the country almost a decade
earlier. The U.K. company will develop 80 five-story Lifespace
malls, complete with movie theaters and restaurants, in the next
five years in China, open as many as 20 hypermarkets annually
and is testing a convenience store format in Shanghai.

Under Clarke, who was appointed international head in 2003,
Tesco has stepped up expansion overseas after Leahy built it
into the U.K.’s biggest retailer. Cheshunt, England-based Tesco
entered China in 2004, the U.S. in 2007 and counts South Korea
as its second-biggest market after the U.K. Tesco is also on a
shortlist of buyers for some Carrefour stores in Southeast Asia,
three people familiar with the matter said Sept. 9.

“Certainly China is expected to be the next Korea in terms
of contribution to the group and in terms of size within the
group,” said Andrew Kasoulis, an analyst at Credit Suisse in
London. Tesco made 440 million pounds trading profit last year
in Asia, where it gets about 12 percent of sales, it said in
April.

Chinese Growth

Tesco is also unprofitable in the U.S. In April, the
retailer said its loss in the country wouldn’t be much lower in
the current fiscal year than the 165 million-pound trading loss
last year.

International retailers have an opportunity to grab sales
in China, where Planet Retail estimates grocery retail sales
will hit $969 billion this year. Modern shops like hypermarkets
account for about 3 percent of the total market, with the
remainder of food being sold at so-called traditional or wet
markets and in independent shops, it estimates.

For the U.K., where the grocer generates more than 70
percent of revenue, Tesco in June forecast same-store sales
growth of 3 percent in the current fiscal year. Total Chinese
retail sales growth advanced 18.4 percent in August. Tesco
doesn’t break out sales or profit in China.

Opening Stores

Clarke said the stores are profitable on their own.

“If we withdrew the investment in capability we’d be
making money now, but we’re trying to build a business for the
long-term,” he said. “So it’s going to be profitable during my
tenure, I’ve no doubt about that at all, but it is going to have
to be sustainable profitability.”

The company is using its cash as well as selling and
leasing back some of its U.K. stores to fund the expansion in
China. It plans to open another 9 this year.

In China, the grocer has 82 hypermarkets, 11 convenience
outlets and three Lifespace malls. At the shopping centers,
Tesco rents space to restaurants, movie theaters and other shops
while hawking its own goods over two floors of grocery and non-
food space.

The strategy of building malls gives Tesco more control
over the smaller retailers who surround its hypermarkets,
removes the threat of not having leases renewed and means it
controls the building standards, Tesco China CEO Ken Towle said
in a separate interview.

Qinhuangdao

The company’s largest mall in China, a 400,000-square foot
(37,161 square-meter) mall in the summer resort town of
Qinhuangdao, has attracted a quarter of million visitors a week
since opening in February.

The Tesco store features grocery products displayed with a
“market” atmosphere as employees call out the price of live
crabs in ice buckets and chicken feet, while the shelves offer
packets of flavor-enhancer MSG, or monosodium glutamate and
Tesco own-brand “Value” lines such as soya bean oil. The
company also sells non-food items like rice cookers and its
Florence & Fred clothing line.

Across China, Towle says Tesco shoppers make 4.5 million
transactions a week. The U.K. currently records around 20
million a week.

“The investment cycle will continue for a long time and so
the maturity will go on for a long time,” Towle said. Tesco
defines maturity as when a store reaches average like-for-like
sales growth for a country.

India, Korea

Tesco is developing the malls through joint parterships.
The first three malls in Anshan, Fushan and Qinhuangdao were
part of a project with Asian investors including HSBC Nan Fung
China Real Estate Fund, Singapore’s Metro Holdings Ltd and Hong
Kong’s Nan Fung Group. Tesco partners will spend another 2
billion pounds in the next five years to develop malls.

Tesco is also stepping up expansion in other Asian
countries. In India, Tesco plans to start a cash-and-carry
business next year and, as part of a franchise agreement with
Tata Group’s retail arm, will provide products and retail
expertise to up to 50 Star Bazaar hypermarkets. India has “good
prospects” but is “probably for the next decade, not this
decade,” Clarke said.

In South Korea, where Tesco operates 226 convenience
stores, local Chief Executive Officer Seung-Han Lee has started
franchising the Homeplus Express format. The model helps to
quell opposition from smaller, independent store operators by
offering them employment. Tesco has opened 18 of the outlets in
the country this year. Tesco may consider replicating the
franchise model in other countries, Clarke said.

After “thirteen years in Asia, we’ve built a very
significant business and it’s got such terrific growth
prospects,” Clarke said.